The Tulip Mania and the Bitcoin has been one of the most talked about phenomena following the recent performance of Bitcoin.
The tale of the Tulip Mania presents the emergence of a beautiful flower that stood above the guilders and reached the level of gold to command interests from all walks of life and all part of the world in the 1600s.
To those who have little or no idea of this old flower, Tulip Mania was first sent to Europe in 1554 together with the seeds from the Ottoman Empire. Unlike Bitcoin that can be transacted on Whatsapp Messenger, Tulip Mania could only flourish on the ground under certain environmental conditions coupled with care.
Tulip Mania could only grow on the ground with the provision of limited environmental condition and continuous nurture. It first made its way to Vienna and later got distributed to Antwerp, Augsburg, and Amsterdam. Its proper cultivation started in the 1590s. The saturated petal and the beauty of the flower got attention and slowly built up its price with increasing demand. In 1610, a bulb of tulip was accepted as a dowry.
Tulip Mania became the talking point of households and media, and soon, people sought after the bulb, not for its beauty, but the profit. “Neighbors seemed to talk to neighbors; colleagues with colleagues; shopkeepers, booksellers, bakers, and doctors with their clients gives one the sense of a community gripped, for a time, by this new fascination and enthralled by a sudden vision of its profitability,” excerpts from the book “Tulip Mania” written by Anne Goldgar.
The price hit an insane acceleration, rising ten times a day and over 1000 times a month.
In 1633, a Tulip Mania cost 5500 guilders but took an unprecedented jump to record 10000 guilders per bulb in 1637. According to some reports, houses and estates were mortgaged to obtain the bulb for resale at a higher price.
In early 1637, the unthinkable happened, the reality set in and the actual value of the Tulip Mania was revealed. It was highly evident that the price of the Tulip Mania was driven by speculations on the possibility of its future price. However, that very factor that caused the price to skyrocket created the price to fall and eventually crash. What happened? The uncertainty of the future created fear among the holders. This situation made people sell off their bulbs. At a point, the Dutch government tried to save the situation but to no avail.
Also, speculations became higher when future contract was introduced to enable buyers pay a fixed price for the bulb and have it delivered in a time period. This was usually done when the bulb was out season.
In summary, two main factors caused the Tulip Mania to crash:
1. The price was riding on the shoulder of speculations with no proper utility as captured in Anne Goldgar’s book.
2. Introduction of Future Contract.
Introduction to Bitcoin and its Link to Tulip Mania
When Bitcoin was introduced to the world in 2009, it was nothing but “neutral stuff”: no one saw any proper value in it. Just as the early days of the Tulip Mania, Bitcoin had no proper price between January 2009 and March 2010. A user known as “SmokeTooMuch” offered to sell 10000 BTC for just $50, but no one found interest in buying them. According to the price history provided by Wikipedia, there was no market or exchange for cryptocurrencies, and people who engaged in Bitcoin transaction did so for the fun of it until the first exchange was introduced in 2010.
On 17 December 2017, Bitcoin defiled all odds and recorded its highest price in history trading at $19,783.06. The price invited many people to come on board. At this stage, many people who bought Bitcoin did so for the profit, but not for any other use.
The sudden fall of Bitcoin raised a serious question and took some market analysts including Elliot Prechter back to the hay days of the Tulip Mania. Many people became critics who criticized the coin on the ground of:
1. Bitcoin has no Real Value Just like Tulip Mania and it’s a Bubble Preparing to Burst According to Some Experts
Yoshitaka Kitao, the head of SBI holding recently sided with the former CEO of PayPal, Bill Harris on the point that Bitcoin has no real value. He said that “There is basically no value for Bitcoin. The current price of Bitcoin makes it harder and harder to use in practical ways.”
Not just him, many experts have made similar allegations against Bitcoin. If this is true, then there is a severe course for concern because Tulip Mania partly crashed for having no real value.
Bitcoin having no real value means its current price is nothing but a deceptive display of speculation. In this case, the faith invested in it by holders is what keeps it rising. When everyone sells off their share of the asset, the price will come back to zero since it has no other valuable use. Whether this is true or not will be addressed below.
Usually when an asset has no real value, its price is determined by speculation. Valuation is inversely proportional to speculations. Matured companies usually get their prices from the positive performance of their value, but not speculations.
When speculations on the future of Tulip Mania became negative, the price dropped to zero. It is undeniable fact that Bitcoin is a speculative asset. According to Stephen Pair, the CEO of Bitpay, the Bitcoin price is more determined by speculations than utility. In this case, things may become worse when speculations become negative.
Tulip Mania Crashed for a Different Reason
It is true that Tulip Mania crashed due to speculations but one of the primary reasons why it failed was the introduction of future contract. The Tulip Mania bubbled and burst because buyers at some point refused to fulfill their part of the contract. Future contract has been introduced into Bitcoin but unlike Tulip Mania, everything is working well.
Bitcoin on the other hand fell down the price curve for a reason different from what caused the crash of the Tulip Mania. The price of Bitcoin recently took a huge fall due to the fact that Governments launched crackdowns on ICOs and Cryptocurrencies in China and other countries, and this affected the price intensely to trade below $4000. Bitcoin at a point surged in price due to favorable government regulation coupled with speculations.
Accessing the Similarities of Bitcoin and Tulip Mania in the light of Value
Tulip Mania had a market value which was determined by the invisible forces of demand and supply with same applying to Bitcoin. The current value of Bitcoin is $4162 according to Coinmarketcap. There are many factors that determines the demand of an asset of which speculation of its future price point is a core factor. Value is defined as “the regard that something is held to deserve; the importance, worth, or usefulness of something,”. The magnitude of usefulness and important attached to an asset is what appears in the market as a price. Accessing their usefulness outside numerical value, the Tulip Mania is way behind Bitcoin thanks to the Blockchain.
The Tulip Mania had no real use, never qualified as a currency and its price had nothing to do with change in production cost.
According to some research, the flower could survive in a good weather condition for 10 to 20 years, meaning a good care has to be invested in the flower to keep it in shape right after buying it. Durability and divisibility as important attributes of money disqualified it from being a currency. Also, the Tulip Mania had no proper use.
Bitcoin which is largely referred to as virtual currency has a clear limited supply of 21 billion. It is divisible, highly durable, not controlled and even qualifies as a store of value and all other characteristics of money.
The Usefulness of Bitcoin is Spearheaded by Blockchain
Bitcoin is mainly powered by Blockchain which makes it valuable in the present and open to new innovations in the future. Comparing this Blockchain powered Bitcoin to the Dutch Tulip Mania is a bit unfair.
The Blockchain in itself has a long success of creating a decentralized, fast, reliable, secured and improved transaction. Data stored on the Blockchain cannot be hacked or changed and this has played an important role in accelerating the adoption rate of Bitcoin.
The Blockchain has made Bitcoin a strong candidate to fight corruption in many countries considering its ability to record every single transaction in its public ledger for transparency sake. The Tulip Mania was no where near this initiative.
The possibility of using the Blockchain in diverse areas are being explored by a number of companies including Facebook. Its success in hosting cryptocurrencies such as Bitcoin and Ethereum for transaction has made it one of the hopes available in the financial world. In fact, there are many other useful things the Blockchain can be employed. Bitcoin has stood tall over the years as its very existence and successful use of the Blockchain has influenced other institutions and governments to explore its use.
What About their Intrinsic Value and Subjective Value?
It is highly probable that any asset that become a bubble would surely burst. Usually, an asset becomes a bubble when its price largely deviate from its intrinsic value. Other than the market value of an asset, there is another form of value which put both Tulip Mania and Bitcoin in the same basket. Tulip Mania had intrinsic value and same applies to Bitcoin.
With the concept of intrinsic value, the value of an asset is determined by the value in itself. The value comes from the process involved in producing it or the cost of production. This has a lot to do with the value of labor theory which award value to labor involved in its production.
Cultivating Tulip Mania involved a lot of labor as cultivators had to ensure that it grows in the right weather conditions and take care of it till it gets ready. Producing Bitcoin involves a level of mining, computer power and time. This makes the two assets fit rightly in the intrinsic value theory.
It can also be argued that their prices were not determined by their real labor cost, and in whatever way, both Bitcoin and Tulip Mania falls in the same category.
Analyzing their value using the subjective theory of value also make these two assets have a shared characteristics. The subjective theory of value focus on the idea that the value of an asset is determined by the different desires of people and their usefulness. In this case, its value depends on the satisfaction it gives to a person.
This makes a case for Tulip Mania since it was once desired for its beauty and at a point for its return.
Bitcoin has now settled as a medium of exchange in many institutions and online firms. It has also settled as an investible asset which makes majority of people to go after it for that purpose. Though Bitcoin is not tangible like gold, it has a lot of purpose it serves on the internet which gives it a value.
Can Price Go Below Intrinsic value of Bitcoin?
Since Bitcoin has a level of intrinsic value, the question is “can the price go below its labor cost? Firstly, the market price of the asset is determined by the interplay of demand and supply. When the demand for Bitcoin increases significantly above the supply as a results of the speculations of its future, the price would trade far above its intrinsic value and the reverse is true. When the demand falls, the price would trade below its intrinsic value. So yes, the market price can go below its “ hardware cost X times Electricity cost Y.”
In conclusion, Bitcoin is no different from the Tulip Mania with regards to most of the underlying factors that mainly affects its price. However, it has been able to gain grounds and recorded an insane adoption rate with the Blockchain as the backbone alongside its good stands in the monetary world and the usefulness it has been which makes it challenging to burst as predicted.